The year 2024 will bring us as drivers a number of changes in the rules, as well as new traffic signs. For self-employed people and companies, VAT payers and non-payers, one thing is also changing, which will affect the purchase of personal vehicles, reflected in their costs and VAT deduction.
The so-called limit vehicles, specifically passenger cars of the M1 category, are returned to the Income Tax Act, which entrepreneurs will be able to reflect in costs/expenses in the form of depreciation only up to the value of two million crowns.
How to imagine this in practice? If by the end of the year an entrepreneur (VAT payer) buys an M1 passenger car used only for business at a price of three million without tax, i.e. for 3.63 million crowns with tax, the state will return the 630,000 CZK as part of the VAT refund.
3.63 million will actually go from the entrepreneur’s account to the seller’s account, but the state will return the 630,000 CZK to the entrepreneur’s account. The VAT payer’s vehicle therefore costs de facto only a net three million.
In addition to this, however, the entrepreneur (VAT payer and non-VAT payer) can spread the value of the car without tax (the value with tax for non-payer) for a period of five years into his costs, which will reduce his profit tax. If we divide the three million (3.63 million for VAT non-payer) into five parts for a better illustration (the deduction amounts are actually disproportionate), we get CZK 600,000.
On the assumption that an entrepreneur (always a legal entity within the scope of our article) has a regular annual income of one million crowns and regular annual expenses of CZK 300,000, he pays 19% profit tax on the amount of CZK 700,000. So he will pay the state 133,000 CZK.
However, if the entrepreneur projects a car into the costs, the situation looks different. An entrepreneur earns a million a year and has costs of CZK 300,000, while he adds another CZK 600,000 (part of the amount for the car) every year for five years, tax of 19% of the sum of CZK 100,000, so he pays the state CZK 19,000. In the case of non-payment of VAT, the cost amount is CZK 726,000.
Individual entrepreneurs are taxed differently
Attention, natural persons running a business have a profit tax of only 15% (or 23% with income above CZK 1,935,552) and not 19% as legal entities (limited liability companies, joint-stock companies, associations and other entities registered in the commercial register).
How will it be next year?
After 2024, an entrepreneur will buy a new M1 category car for 3.63 million crowns including VAT. In addition to the fact that this purchase will employ his accountant for longer, which will therefore be more expensive, you will only get back CZK 420,000 (21% of 2 million) as part of the VAT refund, instead of CZK 630,000. For a businessman (VAT payer), the given car will cost 3.21 million crowns (instead of three million) for the time being.
And it will be different even in the case of applying the car to the costs. Let’s take a model example again, where an entrepreneur (VAT payer and non-VAT payer) earns a million a year, costs CZK 300,000, but can claim the cost of purchasing an M1 car every year for five years in the amount of CZK 400,000.
Well, yes, but the vehicle cost three million without tax (3.63 million for non-VAT payers), so where is the remaining million, i.e. 1.63 million crowns? It is a so-called non-tax expense, from which the state will extract additional money. Let’s look at it in terms of numbers.
Earnings million, deduction of CZK 300,000 expenses, deduction of CZK 400,000 car. The result is a profit subject to 19% taxation of CZK 300,000, which would be CZK 57,000 in profit tax, but… The non-taxable cost must be added to the amount to be taxed, which in the first year after buying the car amounts to the aforementioned million, i.e. 1.63 million for VAT non-payers.
Therefore, the first year after the purchase of an M1 passenger car in our example, the taxable amount will be 1.3 million (non-payers 1.93 million crowns). The tax levy on profit is thus 247,000 CZK for VAT payers at once, i.e. 190,000 CZK more. For non-payers, the profit tax is CZK 366,700 (i.e. by CZK 309,700 more), however, for both VAT payers and non-payers, the fact that they can divide the non-tax burden into five parts and thus not have the first year after buying an expensive M1 car for the company so high taxes on profits.
If you add the amount of CZK 190,000 to the purchase price, what the entrepreneur actually paid and add what he lost due to the change in the law, we arrive at CZK 3.21 million + CZK 190,000, which is equal to CZK 3.4 million. The simple math of the model example follows from this, as a VAT payer, buy now, because from January 2024 you will actually pay CZK 400,000 more when buying an M1 passenger car for three million without VAT.
It will be even worse for the non-VAT payer, who will de facto pay 3.63 million crowns for the car + 309,700 CZK extra in profit tax. A total of CZK 3,939,700.
A businessman’s point of view
This controversial decision understandably angered entrepreneurs, and even more VAT payers, because they cannot put more expensive passenger cars in their cargo and claim the full VAT. It smacks a bit of restricting personal freedom, because if someone has earned money on the given car, runs a company, pays taxes in the Czech Republic, why can’t he have the same deduction conditions as someone less successful who only earned money on a car for 500,000 CZK. Such a car will cost you everything.
In its defense, the government claims that businessmen abused the purchase of cars for the company and used the cars for their personal use. Surely some do, but what about VIP taxi drivers, fancier transport companies, hotel services of better hotels or other transporters who use more luxurious cars? That classic Mercedes simply costs three million and more…
And do you know who will pay for this increase in costs for entrepreneurs? Whether it is a carrier or ordinary entrepreneurs/companies who have better passenger cars in their cargo. After all, customers at higher prices for services/products, so maybe you too.
And since we are in the Czech Republic, where anything goes, maybe we will go back to the past, when passenger cars were converted into trucks precisely because of tax deductions. From 2024, the technical testing facilities will probably have a pre and will convert more than one BMW X5, Range Rover or even Mercedes-Benz GLS to N1 (light commercial vehicle). Thanks to European legislation, you only need to have a sufficiently long suitcase, and converting to the N1 category is not that complicated.
And who knows what it will do to the thinking of entrepreneurs who would like to buy an expensive, but fully electric car. Maybe he’ll change his mind and buy its cheaper combustion equivalent. It may also have the effect of increasing the prices of young used cars or of entrepreneurs reducing investment in their business.
From a citizen’s point of view
The advantage of this regulation, on the other hand, is that the state will collect more for itself in taxes, i.e. after raising the price of services from tax payers, also in VAT. This can theoretically be reflected in the recovery of the state budget, or in investments where it is needed. But that’s probably the only and legitimately positive thing that this regulation will bring to ordinary people.
On the other hand, the driving engine of the state economy is precisely the small and medium-sized entrepreneurs/companies, for whom the two-million deduction limit for an ordinary passenger car intended for the performance of business activities should be sufficient. Or not? What do you think about this?
Does the two million limit on deductions for M1 passenger cars for entrepreneurs sound right to you?
Yes, it’s fine that way.
A total of 7 readers voted.